denotes premium content | Feb 9 2012 Feature
posted 30 Oct 2008 in Volume 3 Issue 1
THE EMERGING MARKETS – A RECESSION LIFELINE OR A GLOBAL-FIRM NECESSITY?
Joanna Lee investigates.
The East and the West
Once upon a time (early 2000), in an emerging market far far away (
“We’ve acted for a number of the UK/US firms that have decided to come back into the Asian market, having left fairly quickly in the last economic downturn – Denton Wilde Sapte and Pillsbury Winthrop for example,” says James Garzon, a director at Law Alliance, one of
Fast forward to 2007/8 and my, how the tables have turned: “Inevitably, Asia is going to become a far stronger economic power, and an international law firm has to have a presence here regardless of whether the market is going to have a bad year next year or the year after. A firm that is not here, and that considers itself to be a global practice, will not truly be a global player”, Garzon says.
On the western front, we are all very aware of the credit crunch and its never-ending repercussions. This article would not wish to flood you with more of what you already know, so as a brief synopsis of where we are at as we go to press:
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The Confederation of British Industry (CBI) have predicted “... a shallow recession through the second half of 2008... ” meaning “... growth in the economy in 2009 will be the lowest since 1992... ”. Richard Lambert, CBI director-general, said: “Over the past year our forecasts for economic growth have been shaved lower and lower as the
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The European Commission has published its interim economic forecast confirming that “... growth in the euro area and the EU is expected to slow down sharply... ” and that “... even if the economy is set to slow sharply, the risk of second-round effects cannot be excluded... ”. It also predicted two consecutive quarters of 0.2 per cent shrinkage for the
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Quarterly results published by Deloitte show a marked slowdown in
Where did your revenue come from?
While many firms announced substantial, even record-breaking, half-yearly revenue growth, it cannot go unnoticed that much of the credit for this has to be placed at the door of their international offices. The PricewaterhouseCoopers LLP Law Firms Survey 2007, found that “... overseas fee-income growth has continued to be strong with two thirds of the Top-25 firms reporting growth of more than 15 per cent and as many as 37 per cent achieving growth over 25 per cent. Firms do, however, continue to generate a larger proportion of fee income from overseas than they do profits... ”. Foreign offices are clearly outperforming their
“The proportion of our income that is now generated from fee-earners outside the
The emerging markets
Have you deployed your parachute?
It also cannot go unnoticed that firms continue to target the emerging markets as they have not (as yet) been hit hard by the credit crunch, and their economies are seemingly resilient. Law firms and investors alike are looking eastwards and driving business into Asia and the Middle East.
Alan Jenkins, chairman of Eversheds, says: “The demand for legal services in the Middle East is very strong and we are certainly going to be adding to our numbers there in order to meet those needs.”
So are firms parachuting people eastwards? “Without question – if we are looking at both private-practice and in-house certainly they [US and UK] have been sending their lawyers across when things slowed down there. That has been a definite change, and almost every single law firm that has opened up here has parachuted one or two partners across,” says Garzon.
While the opening of new offices seems to coincide with the economic downturn, are we seeing a trend of mitigating moves or rather the results of long-term preparation based on an international strategy? “We did this as result of a long-term strategy not as an immediate response to current economic difficulties in the West,” says Jenkins.
Dariusz Oleszczuk, global managing partner and senior partner in the Warsaw office of Salans, says: “... we too have noticed firms ‘parachuting’ into new markets in the past year, those same markets where we have been for years.”
So what of this seeming trend of firms opening offices abroad in response to the economic downturn? “There’s no question that 2006/7 saw a huge growth in new firms coming into, or investigating, the market: this has continued into 2008. It is likely, however, that when the go ahead was given to come into the market – say 18 months ago – it was done in a very different economic climate,” says Garzon.
“It’s an expensive market to go into in terms of infrastructure, set-up hires and so on, and many firms came in very aggressively. They took on lots of lawyers with the expectation that the work would come, but of course with the downturn we are now seeing firms that have got too many lawyers and not enough work – lawyers are not going to have anywhere near the amount of work that they had last year. We haven’t, however, seen the same situation here as we see in the UK/US, where firms have said ‘ok we’re going to have to let lawyers go’. Most firms here have said ‘we’ll try not to’, but of course if this climate continues for two more quarters, I think redundancies will be inevitable,” he adds.
As mentioned above, some earlier law-firm attempts at the emerging markets did not produce the intended results. Those that stuck around, however, are reaping the benefits of their long-term investment strategies in the face of the domestic crisis. “Of course, with the slowdown, having an effective international set of offices and the ability to transact business for clients in different parts of the world is proving very useful indeed. It diversifies our business risk as well as bringing new opportunities to us,” says Jenkins.
Recession proof?
But are the emerging markets really the lifeline that many firms think they are? While earlier in the year they seemed largely unaffected by the credit crunch, as the world’s economy is shifting, the story is now a little different. Questions are being raised: will there be a sharp slowdown in the emerging markets? Are they as resilient as they have been over the past year?
Emerging markets have traditionally been dependent on the global economic power of the US, but this dependence has slowly begun to shift. “I think that although we are seeing the typical Asian economic cycles, there has been a very real shift in general to Asia becoming more self-sustained than it ever has been before,” says Garzon.
However, whether this decreased dependency will counter the impact of the US economic crisis is another matter. “I’ve had my ear pretty close to the ground and without question it’s going to hit us, in fact we have already started feeling the repercussions. I have spoken to traders, bankers and lawyers who are saying that they are already only working four-hour billing days, with the rest spent on business development. There is definitely a slowdown, but whether it is going to impact as heavily as in the UK/US is hard to tell because there are others avenues that are self-sustaining. One thing is certain – big firms that do not have sufficient client/practice area diversity are definitely going to feel the pinch,” says Garzon.
But what of the volume of reports portraying the emerging markets as the white knights of the economic crisis? “Particularly with China, things have been sensationalised in terms of where the growth is rather than the reality on the ground,” says Garzon. “That’s not to say that there isn’t a very good market there – the strong growth areas continue to be very profitable. I have met with the managing partners of international firms both in Beijing and Shanghai and they have all been fairly bullish in relation to the Asian market in comparison to the European markets. They have not seen the repercussions that we have seen elsewhere and many – unless they come from a financial service background – don’t believe they are going to see repercussions at all. Many have said that they have surprised their home offices by how much profit they have been able to deliver.”
Where and why
People’s Republic of China (PRC)
Deloitte’s summer 2008 Global Economic Outlook found: “Consensus forecasts for China for the next few years point to a slowdown in the economy, but a slowdown for China means growing at around 10 per cent instead of 11 per cent per year. Surely, this is the kind of slowdown any country would like to have.” It also states that “... the likelihood of Asian countries like China [...] following the US into a recession are slim”.
So is the PRC the place to be? “I definitely notice firms following their clients to the PRC. They act for large corporations, Fortune 50 or FTSE 25 corporations elsewhere in the world and have essentially followed them to China or risk losing that client to another law firm. I know there are firms out there that are yet to turn a profit – they have gone in knowing that they are perhaps going to run at a loss but have taken the risk to be there to ensure they can manage their client bases,” says Garzon.
“It’s basically been a bull market for around seven years. Five years ago there was no real discernible Shanghai or Beijing market – people were just placing senior international lawyers into international firms. That market has changed to become very localised – you really have to be on the ground dealing in mandarin with mandarin-speaking local candidates.”
With Slaughter & May having just announced plans to open an office in Beijing, Christopher Saul, senior partner, says: “This is, of course, a vibrant time in the economic development of the PRC.” And the reason for Slaughter and May’s Beijing opening? Saul says: “This move is a natural and exciting development in Slaughter and May’s international strategy. We have a long-standing practice in Hong Kong, with an increasing focus on China work... so it is a logical step for us to develop our co-operation with leading Chinese firms and to join forces with our ‘best friends’ in establishing a physical presence in Beijing.” He adds: “This is fully consistent with our international strategy, the focus of which has been maximising the efficiency of our ‘best friends’ approach.”
With a new Salans office also scheduled to open in Beijing, Oleszczuk says: “In terms of China, note that we have been there since 2003... we almost tripled capacity in Shanghai at the start of 2007, knowing our next move was Beijing and Hong Kong. We had a proven base of multinational clients who were looking to go into China, as well as Chinese clients who were ready to go to the international markets.” He adds: “The trick with China is to adapt an international strategy to the local market and, while China has emerged economically, it is still very much emerging in terms of legal framework.”
Middle East
And it’s not just the PRC. Not a week goes by without moves to the Middle East being announced. Apart from its burgeoning economy, what are the key reasons for a move to the Middle East? “Increasing numbers of clients doing business in the Middle East; the attractiveness of the Middle East, the United Arab Emirates and Qatar as places to obtain new business from companies, organisations, and government entities; and, if you are going to be a global law firm, then you need to be there,” says Jenkins.
Many firms tackle the Middle East in a similar fashion: the start in Dubai followed by the leap to Abu Dhabi. And with firms currently following the wealth-trail, Qatar is proving a suitable and less-crowded alternative.
“The reason why we are in Abu Dhabi is because it is a natural extension of business we have been doing now in the region for many years. There has been a lot of activity and growth of the legal business in Dubai and we were considering our next move. Dubai has an awful lot of law firms, it’s very competitive – not that we are frightened of competition – but it seemed to us that with Abu Dhabi taking the decision to encourage more foreign law firms to open up, that was a more attractive place for us to go to within the UAE rather than join the rush into Dubai. We applied for our licence earlier this year and got it in April and opened in May – all of this is quite independent of the credit crunch and the slow down,” says Jenkins.
DLA Piper recently strengthened its Middle East practices, entering the market in 2006. David Church, regional managing partner for the Middle East, says: “Across the Middle East there are so many investment and development opportunities; it is the most dynamic economy in the world and as a result there is a demand for international law firms, such as DLA Piper, to work not only for existing multinational clients operating in the region but, very importantly, for the remarkable regional businesses.” Was any development prompted by the downturn? “Our development in the Gulf was well under way before the recent economic difficulties encountered in the West,” Church adds.
What of firms jumping to the Middle East in the hopes of capitalising on its economy given the crises at home? “I think that would be a really bad reason to try and develop in the region,” says Hasson.
“We have been [in the Middle East] since the 1980s when we took over an existing practice. We have been growing at around about 50 per cent per annum in the past three/four years... Some of that has been through opening new offices, expanding out from Dubai and building up teams in Abu Dhabi and Qatar. Our expansion is based around our strategy – we want to be the strongest firm in the Middle East and we are currently the largest in terms of the number of lawyers. We lead in most of the main categories of work and retaining that position is tremendously important to us,” he says.
So was the reason for the expansion client-based or market-lead? “It’s a mix,” Hasson says. “There’s a lot of aviation work out there, for example, so sometimes it can be that clients are out in the region... but also internal moves have been made based on the view that the market was developing in a particular way rather than on specific clients. So we’ve done both.”
What of those firms parachuting lawyers into the Middle East? Hasson offers some advice: “I think the response ‘there’s a downturn here, let’s move people to the Middle East’ is a recipe for disaster. We have heard of the decanting of a property team to the Middle East as there is no work here – I would be surprised if that worked because I think clients can see through that. It is also very difficult as these markets may be growing but they are fiercely competitive and clients expect a high level of service, a commitment to the region and an understanding of what is going on in the region. It is very difficult to do that if what is put in place is a new team being told to just get on with it. The people that we have seen making a real success of that are those fiercely committed to building a career in the region. I would question whether, if you were to move a team of people because their domestic market has turned down, you would have the necessary level of commitment amongst all of the team to really do the hard work that is necessary to build it up.”
Hasson also has some words of warning: “Moving and transplanting people from outside the area is a particularly difficult move – you have to handle such moves carefully... if you are hiring people who have no connection to you, or you are transplanting people into different locations, that cultural fit is much harder and it takes a lot longer to grow it that way.”
Singapore
So as the West dives into decline, the emerging markets are providing early investors with a much-needed return, and while law firms are clearly capitalising, even barristers are looking eastwards.
Stuart Isaacs QC, the first London barrister to be registered as a foreign lawyer in Singapore, has – in addition to practising from his London chambers – set up his own office in the country. Was this led by the state of the markets at home or was it based on clients’ needs? “As an adjunct to practice from my London chambers, the decision to set up my own office in Singapore was the result of encouragement from senior figures in the Singapore legal community to do so. There is a particular need in Singapore for top-quality lawyers experienced in arbitration work, to help Singapore expand as the leading regional arbitration centre in South-East Asia. The decision was wholly unconnected with recent events in the economy. Those events will, if anything increase rather than decrease the work opportunities for litigation and arbitration lawyers in the UK.”
With regards to the potential of the Singapore market, “I do see the Singapore market gaining ground. Singapore is very well placed – both geographically and in terms of infrastructure and a developed system of commercial law – to benefit from the move towards alternative dispute resolution in South-East Asia. It needs well-qualified people from outside Singapore to assist it to achieve this objective and to give it increased credibility internationally as a forum for the resolution of cross-border disputes,” says Isaacs. “However, not everyone will be able to take advantage of Singapore’s increasingly liberal approach towards outside lawyers. If firms or barristers think that they will just be able to march into Singapore without having established the right credentials, then they will be in for disappointment. In particular, it should not be viewed as a fallback for those who may be experiencing downturn in domestic work.”
In summary
To call yourselves a truly global law firm, you must have a physical presence in Asia and the Middle East. If you were lucky enough to have got a foothold in the past few years then you will surely be reaping the benefits and be in a better position to mitigate the domestic market than your contemporaries. If, however, you reacted to the recent economic crisis with a last minute opening, or a partner-parachute, the consensus is to keep your fingers crossed that it works.
Going abroad is not without its risks: “Moving into emerging markets – or expanding your presence there – is both difficult and hazardous, a complex exercise in risk minimisation” [PricewaterhouseCoopers – Doing Deals in Emerging Markets]. For a look at the regulatory and ethical issues which might arise, see the Chasing Revenue Overseas feature in this issue of FD Legal.
